Campus Activewear Limited (CAMPUS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and a very warm welcome to the Campus Activewear Limited, Q1 FY '23 Earnings Conference Call. [Operator Instructions] Before we proceed on this call, let me remind you that the discussion may contain certain forward-looking statements that may involve known and unknown risks, uncertainties and other factors. It may be viewed in conjunction with our businesses that could cause future results, performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. The Campus Activewear's management team is represented by Mr. Nikhil Aggarwal, Whole Time Director and CEO; Mr. Raman Chawla, CFO; and Mr. Piyush Singh, Chief Strategy Officer. I'm now glad to hand the conference over to Mr. Nikhil Aggarwal, Whole Time Director and CEO for his opening remarks. Thank you, and over to you, sir.

Thank you, and welcome, everyone, for joining our quarter 1 FY '23 earnings call today. I believe everyone is staying safe. We appreciate and deeply acknowledge your trust in our vision to create India's leading sports and athleisure footwear brand. I'm delighted to share that our quarterly performance has been in line with our expectations despite an uncertain and inflationary macro environment. There's been a sustained improvement in our Y-o-Y quarterly financials, exhibiting marked improvement in both top line and bottom line numbers compared to quarter 1 FY '22, which was largely impacted by the second wave of COVID-19 last year. Because of seasonality seen across product mix consumption, quarter 1 empirically has been contributing 18% to 20% of our annual net revenue. During quarter 1 FY '23, we sold more than 5.5 million pairs at an aggregate level, thereby clocking net income of INR 338 crores and a Y-o-Y growth of about 150% versus quarter 1 FY '22, which was at about INR 135 crores. Both trade distribution and D2C channels have delivered a holistic growth of more than 150% of these -- on a Y-o-Y basis versus quarter 1 FY '22. Just to highlight, we sold the highest ever first quarter volume in the history of Campus at 5.6 million pairs, registering a Y-o-Y volume metric growth of about 141% in comparison to quarter 1 FY '22. Along with volume, our quarterly ASP is also grown by about 3% from INR 580 in quarter 1 FY '22 to INR 597 in quarter 1 FY '23. Despite the challenging inflationary environment. Campus Activewear balance sheet continues to demonstrate strength with robust return ratios such as ROCE and ROE of 37.4% and 38.2%, respectively, as on June 30, 2022. We are sincerely thankful to our end consumers, our channel partners and our passionate team, which has helped us in delivering this performance, which earmarked the underlying strength and resilience of the brand. As always, we thank you for your invaluable support and investment. I will now hand over to our Chief Strategy Officer, Mr. Piyush Singh, for his remarks. Thank you.

Thank you, Nikhil, and greetings to everyone. Adding on to what Nikhil just said, while FY '22 was an exciting year for all our stakeholders, we have started FY '23 on a strong note from both an operational and a financial performance standpoint. All our distribution channels, category cohorts and price segments have demonstrated robust growth, both in terms of volume and value amid the challenging operating environment impacted by supply chain disruptions and inflationary trends. Basis price segments, our sealed rate in quarter 1 FY '23 has exhibited sustained premiumization, vis-a-vis, FY '22 full year, wherein sales contribution from semi premium and premium categories have increased from 64% in FY '22 full year to 68% in quarter 1 FY '23. Similarly, on a category basis, the revenue mix across men and women and kids have improved from 84:16 in the favor of men in FY '22 full year basis to 81:19 in quarter 1 FY '23 for men and women and kids, respectively. On a trailing 12-month basis, revenue from operations increased by almost 17% on a year-on-year basis to INR 1,397 crores in TTM Q1 FY '23, as compared to FY '22 full year revenue at INR 1,194 crores. Similarly, TTM quarter 1 FY '23 EBITDA stood at INR 290 crores as compared to FY '22 full year EBITDA at INR 242 crores, demonstrating almost a 19% year-on-year growth. TTM quarter 1 FY '23 EBITDA margin also improved at 20.8% versus 20.4% for FY '22 full year. Net profit during trailing 12 months of quarter 1 FY '23 stood at INR 151 crores with a PAT margin of 10.8%, as against full year FY '22 PAT of INR 124 crores at a margin of 10.4%. On the supply chain front, we continue to stay cautious of the challenging inflationary environment in the near medium-term, ensuring that RM and semi-finished goods availability above everything else to maximize sales potential in the coming quarters. We continue to maintain a close watch on our input costs as well. As an outcome, while our material margin has improved from 48.4% in quarter 4 of FY '22 to 49.6% in quarter 1 of FY '23, our gross margins have stayed intact at 36% across both the quarters. We are confident of maintaining that trend line growth trajectory and margin profile in the near to medium-term. I will now hand over to our CFO, Mr. Raman Chawla, to take you through more details on the quarter 1 FY '23 performance. Over to you, Raman.

Thanks, Piyush. Thank you so much. Good afternoon, everyone, and welcome to quarter 1 FY '23 earnings call of Campus Activewear Limited. During the quarter, under review, Campus as a brand demonstrated a lot of resilience. Campus delivered its best first quarter, both in terms of top line and the bottom line growth. Revenue from operations increased by 149.6% year-on-year to INR 338 crores during the quarter with both channels, visible trade distribution and D2C exhibited similar Y-o-Y growth profile in this quarter at about 150% year-on-year growth. Our quarter 1 FY '23 sales volume registered at 5.6 million pairs as against 2.3 million pairs in quarter 1 FY '22, thereby generating a 141% year-on-year volume growth, while quarter 1 FY '23 aggregate ASP stood at 597 versus 580 in quarter 1 FY '22, thereby resulting about 3% year-on-year ASP growth. In terms of profitability, EBITDA was at INR 62.3 crores in quarter 1 FY '23, as compared to INR 16.1 crores in quarter 1 FY '22. EBITDA margin stood at 18.4% in quarter 1 FY '23 versus 11.9% in quarter 1 FY '22. In terms of our net profit during the quarter, it stood at INR 28.7 crores as compared to INR 2 crores in quarter 1 FY '22. And our profit margins, PAT margin stood at 8.5% in this quarter versus 1.5% in quarter 1 FY '22. Moving on to the balance sheet. Our net debt has reduced from INR 174 crores in FY '22 end to INR 124 crores as of 30th June. Net debt-to-EBITDA ratio has improved from 0.7x in FY '22 to 0.4x in TTM quarter FY '23. In terms of -- similarly, our return on capital employed has also gone up from 29.7% in FY '22 to 37.4% in TTM quarter 1 FY '23, and our return on equity has also gone up from 32.9% in FY '22 to 38.2% in TTM quarter 1 FY '23. With this, I'll conclude and hand over to the operator for question and answer. Thank you.

[Operator Instructions] The first question is from the line of Vicky Punjabi from UTI Mutual Fund.

So just the first thing, actually, I wanted to understand the reasons for the seasonality in the business because my thinking was that given 4Q had that Omicron impact, the 1Q volumes could have been a little better than what we saw in the 4Q and Q3 volumes being similar. Can you help me understand what is leading to the seasonality?

Vicky, Nikhil here. Surely. So no, great question, Vicky. We basically don't look at seasonality only on the basis of COVID. While COVID certainly is in the past now, more or less, seasonality for us is also due to the winter season, where there's festivities and when the purchase power of the consumer goes up against the other seasons, other quarters. And also because we primarily dominate in closed footwear category, and our portfolio for open footwear category is very limited. So because of that also, quarter 3 and quarter 4 are basically the highest grossing quarters for us as a company, and quarter 1 and quarter 2 are lower than the other 2 quarters. So there is a fair bit of seasonality, while we have done a lot in the last few years to bring this parity down. I hope that answers your question.

Sure. And just one more thing. I mean, if I see the realizations for this quarter versus, say, realizations for the annual FY '22, it seems to be a bit lower than what it was in FY '22 and on the average realization was in FY '22. And I think in the comments, I heard that we've seen a better premiumization in this quarter versus what you saw in FY '22. Any reasons for that?

Piyush this side. So just adding on to what Nikhil just mentioned. There's a fair bit of seasonality in our first half of the financial year because during this time, during the summer months, we sell a larger proportion of open footwear, which are lower ASP product. Now there has been a premiumization with comparison to ASP of quarter 1 of FY '23 versus quarter 1 of FY '22. So on a year-on-year basis, there is a 3% premiumization. But that said, our FY '22 overall numbers in terms of ASP would be a tad higher because second half of the year is not only contributing to roughly 60% of our top line, but it also is a higher ASP generating second half. And hence, our full year blended number is a tad higher, which was at INR 616 for last year, FY '22 full year.

The next question is from the line of Jignesh Kamani from GMO.

Just want to know about if you take about 1Q last year was [ bigger ] because of the COVID. If you were to compare with normally, say, 1Q FY '23, how is the revenue volume and ASP compared to 1Q FY '20?

Piyush this side. Our first quarter FY '20 revenue was almost equivalent to our first quarter FY '22 revenue at INR 135 crores. So from that perspective, it's 150% growth. Similarly, our ASP for this quarter are way better as compared to our first quarter of FY '20 ASP, wherein the ASP of first quarter was closer to 570. This time, it's 590.

And volumes share here?

Volume we see...

So volume in first quarter FY '20, we did 3 million pairs, wherein in first quarter FY '23, we did 5.6 million pairs.

Understood. Sure. Second question is, if you take one last one year, how is the cost increase for you? You mentioned there is a 3% increase in the ASP roughly. So it is commensurate to in terms of all the cost increase? Or how is the scenario right now?

So I'll take that. Hi, Jignesh. Yes, we have taken quite a bit of cost increase already factored into the ASP increase. While there has been certain inflation in the polymers and some raw material and compounds, so far, we have incorporated most of the inflationary price increase. So given the trend now that we are seeing in the markets. We are hoping and we are already seeing the trends to be sort of improving in terms of inflationary increases on the side of raw materials.

So just to add to it, Jignesh, if you look at our quarter-on-quarter trend, while in quarter 4 FY '22, our material margin was 48.5%, it has gone up to 49.5%, just shy of 50% in quarter 1 FY '23. And despite the inflationary environment in trade logistics and some increase in contract worker wages, we were able to maintain our gross margin levels at 36% in both the quarters. So, so far, we have maintained our control over the raw material inflationary prices, while also increasing our ASP because of the product mix.

Understood. Another is on the sneaker, I think since last 1, 1.5 year, we aggressively invested in the sneaker SKU portfolio, everything. How is the current performance of the sneaker and the market feedback? And any idea how is the contribution of sneaker as a category for us right now?

Sure. So contribution right now, I would say, is not very significant because we've just launched the sneaker range very recently. So if you visit any of our showroom videos that we have across the country, about 140 of them, there is -- the sneaker range is present in our reviews now, while we are also in the process of launching a very good sneaker range in the other channels, mainly e-commerce and MBO distribution. So the contribution, I would say, is still at a decent stage, but the response is very, very encouraging.

Understood. And right now, our portfolio will be similar in sneaker in terms of SKU versus your other competitor? Or still we need to improve on the SKU and the portfolio size?

So Jignesh. It's a work in progress, I would say. So it's not like that we don't follow a system where we just launch one range and then we're done for the year. So it's a continuous process for us. And like I told you already, a good range has been launched in our review channel and very soon, you will see a different kind of range for the other 2 channels as well.

Understood. My last question on the seasonality. You mentioned that 1Q is around 18% to 20% of the full year revenue. Is the seasonality there in the margin also across the various quarters?

So yes, Jignesh. So in the initial quarters, there is a fair bit of fixed cost absorption that happened. As we progress down the financial year, our operating leverage keeps on improving from here on. So we see 2 levels of improvement, 1 at the material margin, gross margin level because of the enhanced product mix and a high ASP and our relatively high share of high ESG product being sold. And the second is on account of operating leverage with a better absorption of fixed cost in quarter 3 and quarter 4.

[Operator Instructions] The next question is from the line of Ankit Kedia from Phillip Capital.

A couple of questions from my side. While you have shared the growth across the channels, could we get the revenue split across the channels?

Yes. Sure, Ankit. So our trade distribution channel out of INR 338 crores have done almost close to INR 200 crores, INR 199 crores, to be precise, and the remaining comes from our D2C channel, which is the balance, it's INR 113 crores from e-commerce and another INR 21 crores from our EBO plus key account.

So on seasonality perspective, do you see seasonality across channels or a particular channel like the trade channel has more seasonality while online should not be so seasonal in nature given that customers would tend to buy throughout the year on online channel?

So it's not about customers buying across all the channels, it's about what kind of product are the customers buying. So seasonality is holistic across all the channels. So for example, we see lower ASPs across all the channels, relatively slightly lower ASPs because if the aggregate is 597, vis-a-vis, 616 for full year FY '22, we see a slight drop of say, 1, you can say, 2% to 3% in terms of ASP across trade distribution e-commerce. Because irrespective of the customer journey, the customer ends up buying relatively higher share of slip-on, sliders and sandals in the first quarter and the second quarter when in the entire Northeast and Western India belt, there is a high degree of summer season and higher temperature ranges. As winter months comes in with festivities and more marriages and colder season coming, people tend to switch to close footwear, which has a higher ASP. So seasonality is holistic across all channels. Just to answer your question.

Also, just to add, Ankit, there is also an element of school shoes, which are also lower in ASP compared to regular footwear. So that's also mostly sold during quarter 1, during this time, which also brings on the [indiscernible] slightly.

Sure. And how big would be a school portfolio now?

It's catching up after 2.5 years. Earlier, it used to be roughly 8% to 10% of our portfolio, now it's again catching up and very soon, we'll be in the same trend line.

So the kid's portfolio is broadly, school shoes portfolio? Should we understand that way?

The kid's portfolio for us so far over the last 2 years was ex school shoes, and it's roughly 10% as of now.

Sure. My second question is regarding your working capital. So on FY '22 to Q1, we have seen a significant decline. Can you just throw some light on the inventory and receivable days?

Yes, sure. Ankit, so while our receivable days, you will be happy to know that our receivable days have improved from 40 days of sales outstanding to 35 days of sales outstanding. We are still maintaining the same level of inventory cover at almost 108 days of sales outstanding for the reason that quarter -- end of quarter 1 is just the precursor of the beginning of our festive season. Because as you enter into July and August and September, a lot of offtake starts across online and our trade distribution channel. So at this point in time, we tend to maintain the highest level of inventory cover just in order -- just from a season preparedness perspective. Despite that, our inventory cover in terms of days sales outstanding stays the same. While we have managed to work on our payable days and stretch it to a certain extent, and hence, you see a significant improvement in our net working capital.

The next question is from the line of Manish Poddar from Motilal Oswal Asset Management.

So I have 3 questions. First is, like you mentioned the 3-year volume CAGR across for the business. Can you help me with that for men, women and kids?

Sorry, Manish, your voice is a little garbled. Can you please repeat your question?

So I'm just trying to understand 3-year volume CAGR for men, women and kids for this quarter. What would that number be?

So -- see, while we can take that question offline, but I can give you a breakup. So last year for full year FY '22, our distribution between men and women and kids' portfolio was 84% towards men; and 16% towards women and kids, wherein it was equally spread between 8% apiece across women and kids. It has improved to almost 80:20 now, whereas 80% is towards men and 10% is for women and remaining 10% is for kids and child. And the year before that, FY '21, if you want to look at, the ratio was again very close to it. It was almost 88:12, wherein 88% was men and remaining 6% apiece was kids and child and women.

Okay. Okay. Would you be able to help me with how much was ad spend during this quarter and the last quarter, Q4 FY '22, absolute amount?

Yes, this quarter, we have managed -- we spent about INR 17-odd crores in marketing, which is roughly 5.2%.

And last quarter, we did almost INR 9 crores. So see for us, ad spend on a trend line basis are expected to stay between 6%, 6.5% of our top line. But there is some bit of lumpiness depending on what kind of product portfolio are you marketing and what kind of regions are you targeting, plus the channel you're targeting. So quarter 1 for us typically contributes 5%, 5% to 5.5% of our ad spend. Quarter 3 tends to -- quarter 2 and quarter 3 tends to be heavy because they are the start of the season and the middle of the season. And quarter 1 typically is the -- quarter 4 is typically the lowest quarter in terms of ad spend for us. And for quarter 4 FY '22, this was 2.5%. Quarter 1 FY '23 is 5%.

So effectively, the delta change and other expenses, is largely because of the ad expense?

Yes, it's because of the ad spend and some bit of employee appraisal that changes from quarter 4 FY '22 to quarter 1 FY '23.

Yes. And annualization.

And the annualization number, I mean, because it is spread over the full year now.

Just one last thing. Just one last one, if I can.

Manish, I'm sorry to interrupt. May we request you to come back in queue for follow-up questions. [Operator Instructions] The next question is from the line of Akshay Kothari from Envision Capital.

Sir, in the last call, you mentioned that we were focusing on product of aspiration, accessibility, affordability. I had a question regarding aspiration. So my question is specific like which are the major leagues are we looking to sponsor, for example, IPL, Pro Kabaddi or Commonwealth? And who would be our brand ambassador? Do we have any brand ambassador? And in terms of adjacencies, are we planning to go into the sports specific like football studs, cricket spikes or badminton shoes, any of those? That's my question.

Akshay. Nikhil here. So let me answer your second question first. We are not looking at any performance shoes category right now, like cricket or badminton and all. Because it's a fairly very niche market in India, very, very concentrated. So we do more of everyday wear shoes, which our audience, our consumers can wear throughout the day and for all purposes whatsoever they need. And with regards to any of the aspiration components that you spoke about. We basically, we follow a very stringent firstly, an ROI-based marketing model. So we absolutely make sure that wherever we do spend in the marketing, there has to be significant ROI generated from that. And given the kind of -- the relatability and that these platforms have today, it's not exactly very ROI generating for us, the marketing in these, let me say, the IPL league, separately. So that is one of the main reasons why we shy away a little bit from marketing over there. But given we're not totally closed off to it, so if the right opportunity presents at the right time, we could be open to looking at that as well in the future.

We are a fashion forward organization, and the kind of portfolio that we offer is bringing you the latest fashion trends globally for the first time in India in the fastest time possible. From that standpoint, we have pivoted the marketing spend more towards digital influencer and community and all, where the relatability quotient is relatively higher. We are always on the lookout for the right kind of celebrity and endorsement, be it sports league that you talked about, be it kind of impact properties across OTT and TV channels, or be it any celebrity. But it has to -- as Nikhil rightly mentioned, it has to justify the bottom line and the ROI that we are expecting out of it. And hence, all the decisions are driven by the profitability metrics.

The next question is from the line of Aliasgar Shakir from Motilal Oswal.

A couple of questions. First is on the margin profile. You did indicate that as the quarter goes by, you have heavy quarters, Q3, Q2, which are higher operating leverage and higher margin accretive quarters. Just if you could also help us understand from a 2-year point of view the kind of growth, one, we are seeing and second is the kind of ASP mix improvement we are seeing, what is the kind of margin improvement one should think of? How we should think of the margin improvement?

So Ali, unfortunately, we cannot give you any forward-looking statements. But what we can tell you is that historically, we performed at a good 8% to 9% of ASP growth minimum and about, I would say, 22% to 23% volume growth for the last 10 years, almost 8 to 10 years. And there is no reason we should be looking at performing lesser than that. So that's been the historical trend for the company. Even in terms of margins, we have seen a good 1% to 1.5% growth in both the gross margins and flowing down to the EBITDA and PAT margins for the last at least 3 years, right? So there has been significant margin improvement. And we are working on many, many initiatives right now, a very fruitful initiative, which should lead to higher gross margins as well.

Got it. This is very helpful. I mean, I was coming more from the point of view that if I see last 3 to 4 years EBITDA margins, in fact, and of course, even gross margin has gone up by nearly 400, 500 bps. So I mean you still see room for improvement even from this level with the kind of revenue growth that you indicated?

Yes, obviously because operating leverage would keep on kicking in with the enhanced sales. If we -- even if we maintain the same revenue growth trajectory, that is bound to show its impact on the operating leverage side.

Got it. This is very helpful. And second quick question is on the economics of the business in online versus offline. So is online equally margin accretive, if you could just explain the margin profile between both on gross and EBITDA level?

Sure, Ali. I mean, while we have explained this historically on an FY '22 full year basis, I won't comment this on a quarter-on-quarter basis. But from a full year trend line perspective, our D2C online channel has contributed at a higher EBITDA margin levels compared to our trade distribution level. So there is a delta of 300 to 400 bps in terms of margin, vis-a-vis, trade distribution versus our D2C online platforms with D2C online contributing a higher margin. In fact, the reason historically, for shift in our margin profile is largely because our D2C online business has grown to almost 35% revenue contribution.

That's both at gross and EBITDA level?

Yes, absolutely.

The next question is from the line of Jaykumar Doshi from Kotak.